Catastrophe modeling technology has become a vital tool for quantifying, managing, and transferring risk, particularly in the insurance industry. Any company with financial assets exposed to catastrophes or other loss can benefit from catastrophe modeling. Insurers, reinsurers, brokers, financial markets, corporations, and others have all recognized the need to employ quantitative models based on the synthesis of available scientific research to evaluate the probability of financial loss.
Using computerized models, underwriters price risk based on the evaluation of the probability of loss for a particular location and property type as well as manage portfolios of risks according to the degree to which losses correlate from one location to another as part of the same catastrophe event. These probabilistic (stochastic) catastrophe models include, but are not limited to, earthquake, fire following earthquake, tropical/cyclone (hurricanes, typhoons, and cyclones), extra-tropical cyclone (windstorm), storm-surge, river flooding, tornadoes, hailstorms, terrorism and other types of catastrophe events. These catastrophe models are built upon detailed geographical databases describing highly localized variations in hazard characteristics, as well as databases capturing property and casualty inventory, building stock, and insurance exposure information.
Modeling systems using these models allow catastrophe managers, analysts, underwriters and others in the insurance markets (and elsewhere) to capture exposure data, to analyze risk for individual accounts or portfolios, to monitor risk aggregates, and to set business strategy. Typical catastrophe modeling systems are built around a geographical model comprising exposure information for specific bounded locations or areas. These locations or areas of interest are typically defined using for example, postal code boundaries, including ZIP codes, city (or other administrative) boundaries, electoral or census ward boundaries and similar bounded geographical subdivisions.
A drawback of using these types of mechanisms (e.g., postal boundaries, cities, municipalities, building Ids, or zip codes) to define locations or areas is that they tend to change over time.
Another drawback of these types of mechanisms to define locations or areas is that they do not allow the system or user the flexibility to select different resolutions. In addition, it may be very difficult to identify a single location that characterizes the risk of the whole geographic area.
These and other drawbacks exist.